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9. Intangible assets

 GoodwillDevelopment costsNon-recurring costsConcessions, licences and trademarksAcquired through business combinationsOther intangible assetsTotal
1 January 2015       
Cost5,8681,2311,9134211,24676611,445
Amortisation and impairment losses(2,068)(717)(567)(119)(604)(589)(4,664)
Carrying amount3,8005141,3463026421776,781
        
Transportation Assets(38)(4)(1)--(15)(58)
Investments-1001743-51328
Sales(8)--(4)--(12)
Amortisation-(72)(80)(8)(98)(57)(315)
Impairment losses-(18)---(1)(19)
Other changes234-(2)3144(2)305
31 December 20153,9885201,4373245881537,010
Broken down as follows:       
Cost5,8681,2311,9134211,24676611,445
Amortisation and impairment losses(1,880)(711)(476)(97)(658)(613)(4,435)
Carrying amount3,9885201,4373245881537,010
        
Investments-441605-23232
Sales(8)----(1)(9)
Amortisation-(62)(113)(14)(97)(49)(335)
Impairment losses-(3)(13)---(16)
Other changes(157)(9)116(26)12(163)
31 December 20163,8234901,4723314651386,719
Broken down as follows:       
Cost6,0961,2752,0735591,32660311,932
Amortisation and impairment losses(2,273)(785)(601)(228)(861)(465)(5,213)
Carrying amount3,8234901,4723314651386,719
        
31 December 2015       
Gross value  4,719    
Grants  3,282    
        
31 December 2016       
Gross value  4,774    
Grants  3,302    

Goodwill

Goodwill is allocated to the Cash Generating Units (CGUs) or groups of CGUs concerned, which are determined with reference to the Group’s organisational, management and control structure at the reporting date coinciding, as is known, with the Group’s four business segments.

A summary of goodwill by segment at 31 December 2016 and 2015 is as follows:

 31 December 201631 December 2015
Helicopters 1,260 1,337
DRS1,504 1,464 
Leonardo Divisions999 1,127 
Electronics, Defence & Security Systems 2,503 2,591
Aeronautics 60 60
  3,823 3,988

The net decrease compared to 31 December 2015 is mainly due to foreign currency translation differences on goodwill denominated in GBP, solely partially offset by the increase in the DRS goodwill denominated in USD. Goodwill is subject to impairment testing to determine any loss in value. This is done by individual CGU by comparing the carrying amount with the greater of the value in use of the CGU and amount recoverable by sale. In practice, the Group has established an operational hierarchy between calculating the fair value net transaction costs and value in use, where the value in use is estimated first, and then only after, if it is lower than the carrying value, is the fair value net of transaction costs determined. In particular, the value in use is measured by the unlevered discounting of the cash flows resulting from the Group’s five-year business plans prepared by the management of the CGU and incorporated into the plan approved by Leonardo’s Board of Directors, projected beyond the explicit time horizon covered by the plan according to the perpetuity growth method (terminal value), using growth rates (“g-rate”) no greater than those forecast for the markets in which the given CGU operates. The cash flows used were those provided for in the plans adjusted to exclude the effects of future business restructurings, not yet approved, or future investments for improving future performance. Specifically, these cash flows are those generated before financial expense and taxes, and include investments in capital assets and monetary changes in working capital, while excluding cash flows from financial management, extraordinary events or the payment of dividends. The related underlying macro-economic assumptions were made on the basis of external information sources, where available, while the profitability and growth estimates used in the plans were calculated by management based on past experience and expected developments in the Group’s markets.

These cash flows are discounted on a weighted-average cost of capital (WACC) basis calculated using the Capital Asset Pricing Model method. The following factors were taken into account in calculating WACCs:

  • as risk-free rate, the 10- and 20-year gross yield of government bonds of the geographic market of the CGU was used. The drop in these rates justifies the overall decrease of WACCs compared with 2015. In order to evaluate the potential impacts deriving from the partial compensation for the effects of the ECB monetary policy on the Euro area rates, the following sensitivity analysis was developed;
  • the market premium was equal to 5.7%;
  • the sector beta, determined using data pertaining to our major competitors in each sector;
  • the cost of debt applicable to the Group, net of taxes;
  • the debt/equity ratio, determined using data pertaining to our major competitors in each sector.

The growth rates used to project the CGU’s cash flows beyond the explicit term of the plan were estimated by making reference to the growth assumptions of the individual sectors in which said CGUs operate. These assumptions are based on the internal processing of external sources, making reference to a period of time that is usually ten years. The g-rates used for the purposes of the impairment test were equal to 2%, consistently with the actions taken in previous financial years, even in the presence of higher expected growth rates in some sectors.

The mostly important assumptions for the purposes of estimating the cash flows used in determining the value in use are summarised below:

HelicoptersElectronicsAeronautics
WACCXXX
g-rateXXX
ROS as per the planXXX
Flat trend in real terms of the Defence budget in domestic marketsXXX
Growth in production rates of mass production of particular importanceX X

In estimating these basic assumptions, the management made reference, in the case of external variables, to internal information processed on the basis of external surveys, as well as on its knowledge of the markets and of the specific contractual situations.

The following WACCs (after taxes) and (nominal) growth rates were used at 31 December 2016 and 2015:

 31 December 201631 December 2015
 Waccg-rateWaccg-rate
Helicopters7.6%2.0%8.7%2.0%
DRS7.6%2.0%7.9%2.0%
Leonardo Divisions5.5%2.0%7.8%2.0%
Electronics, Defence & Security Systems    
Aeronautics5.9%2.0%7.2%2.0%

Testing revealed no signs of impairment. The Group recognized impairment losses in both of the CGUs in the Electronics, Defence and Security Systems sector in 2011 and 2012, particularly in DRS (totalling €mil. 1,639). The headroom for DRS (i.e. the positive margin calculated during impairment testing) is still lower than that for the other GCUs, even if it is progressively growing. However, it is estimated that the US defence budget, which is the main source of revenue of DRS, will expand over the next few years. Sensitivity analysis was conducted on these results, making reference to the assumptions for which it is reasonably possible that a change in the same may significantly modify the results of the test. The wide positive margins recorded are such that they may not be significantly modified by any changes in the assumptions described above. For information purposes, below are reported the results of all the CGUs. The table below highlights the headroom in the base scenario, compared with the following sensitivity analyses: (i) increase by 50 basis points in the interest rate used to discount cash flows across all the CGUs, other conditions being equal; (ii) reduction by 50 basis points in the growth rate used in calculating the terminal value, other conditions being equal; (iii) reduction by half point in the operating profitability applied to the terminal value, other conditions being equal.

 Margin (base case)Margin post sensitivity
  Waccg-rateROS TV
Helicopters2,5442,0192,1102,529
DRS (USD millions)305102149105
Leonardo Divisions6,4635,2725,4215,653
Electronics, Defence & Security Systems    
Aeronautics12,17810,89311,04710,601

In order to evaluate the possible effects of an increase in the risk-free rates of the Euro area, a sensitivity analysis was developed, as previously said, considering an increase in rates equal to 100 basis points using the following WACCs: the Leonardo Sectors of Helicopters 8.6%, Electronics, Defence and Security Systems 6.5% and Aeronautics 6.9%. Within this scenario, the margins of the 3 CGUs decreased by about 20% although remaining significantly positive (in detail: the Leonardo Sectors of Helicopters €mil. 1,574, Electronics, Defence and Security Systems €mil. 4,347 and Aeronautics €mil. 9,875).

Other intangible assets

Investments in “development costs” refer in particular to the Helicopters (€mil. 13) and Electronics, Defence and Security Systems (€mil. 31) sectors. Investments attributable to “non-recurring costs” are related to the Helicopters (€mil. 91), Aeronautics (€mil. 42) and Electronics, Defence and Security Systems (€mil. 27) segments. As regards programmes that benefit from the provisions of Law 808/85 and that are classified as functional to national security, the portion of capitalised non-recurring costs, pending the fulfilment of the legal requirements for the classification under receivables, is separately disclosed under other non-current assets (Note 12). Receivables for grants assessed by the grantor in relation to capitalised costs (shown here net of the related grants) are illustrated in Note 26.

Total research and development costs, comprising also “development” and “non-recurring costs” just mentioned, as well as the amounts included in the sale contracts or covered by grants, are equal to €mil. 1,373, of which €mil. 175 expensed.

“Concessions, licences and trademarks” includes in particular the value of licenses acquired in previous years in the Helicopters segment. With regard to the full acquisition of the AW609 programme, this value also comprises the estimated variable fees due to Bell Helicopter on the basis of the commercial success of the programme (Nota 22). The change during the period is mainly attributable to the decline in amortisation during the period and the increase resulting from the effect of foreign exchange transactions.

Intangible assets acquired in the course of business combinations mainly decreased as a result of the amortisation and include the following items:

 31 December 201631 December 2015
Know-how6372
Trademarks4445
Backlog and commercial positioning358471
 465588

Specifically, “Backlog and commercial positioning” essentially refers to the portion of the purchase prices of DRS and the UK component related to the Electronics, Defence and Security Systems and Helicopters divisions allocated to this item.

“Other” mainly includes software, which is amortised over a 3 to 5 year period, and intangible assets in progress and advances.

Overall investments were mainly made in the Helicopters (€mil. 108), Aeronautics (€mil. 52) and Electronics, Defence and Security Systems (€mil. 68) sectors.

Commitments are in place for the purchase of intangible assets for €mil. 5 (€mil. 10 at 31 December 2015).